Wednesday, 28 October 2009

Market Timing: Taking advantage of the periodic bouts of market madness

The most important use of past information is to tell us when the market has moved too far out of line. 

By looking at the chart, you would have noticed that the price rises of 1972 or 1981 or 1987 (or 1993 or 1996 or 2007) were excessive and could not possibly be sustained.  If we were rational at that time, we should have liquidated our holding and got out of the market.  (wishful thinking!! worth a serious look into!!!)

Similarly, in 1975 or 1976/1978 or 1986 (or 1998 or 2008), by looking at the chart, we could have seen that the market had become very undervalued and we should have increased our holding, even if it meant that we had to borrow money to do so.  (shocking!!hmmm!!!)

For the rest of the time, we should buy individual shares as and when we believe they have become undervalued, keeping the chart in the background as a point of reference when we evaluate individual shares.  So long as the market as a whole is not too far above the trend line, we can purchase shares which are undervalued according to our computation.  Provided we are reasonably good in our valuation, the long-term improvement in the market should ensure that we make money over the long run.  (very sound advice indeed)

At times, the market may fall below or even well below the level at which we have made our purchases.  This should not worry us because we have based our purchases on good dividend yield and we do not need to sell.  Furthermore, we can take the opportunity to buy more shares and average down the prices of our investments. 

Occasionally, we may even stand to make a lot of money by selling out if our chart tells us that the market has gone mad, as it is prone to now and again. 

We are therefore practising a very defensive strategy, only buying if the shares are undervalued and quickly selling to take advantage of the periodic bouts of market madness when they occur.

Ref:   Stock Market Investment in Malaysia and Singapore by Neoh Soon Kean

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